The Consumer Financial Protection Bureau is likely to be reigned in if not rendered impotent or even abolished under President Trump. He has said he would come “close to dismantling” it along with Dodd-Frank. That is good news for small business, consumers, the economy in general — and note investors.

The CFPB is the brainchild of super-liberal Massachusetts Sen. Elizabeth “Pocahontas” Warren, who never met a business she doesn’t want to regulate.

“At stake is the agency’s aggressive approach to regulating credit and prepaid cards, mortgages, payday and student loans, debt collection, credit reporting and other areas of consumer finance since opening for business in 2011.”

WASHINGTON, Nov. 11, 2016 — Donald Trump has taken the first step to fulfill his campaign promise to “dismantle” Dodd-Frank and the Consumer Financial Protection Bureau. He is considering one of the leading critics of Dodd-Frank on Capitol Hill, Rep. Jeb Hensarling, as Treasury Secretary.

Mr. Hensarling last year laid out a blueprint for replacing Dodd-Frank that many observers view as a starting point. In an interview Thursday, he said the Trump team’s statement “is music to my ears,” and that he planned to make the bill, dubbed the Financial CHOICE Act, his top priority next year.

He said he had spoken with Mr. Trump’s team about the matter in the past, adding: “I think they like the thrust of the legislation and many major components of it.”

As for the prospect of him taking the Treasury slot, the Texas lawmaker said he would “certainly have the discussion” if the Trump administration comes calling, “but I’m not anticipating the telephone call.”

The transition team’s blueprint on the president-elect’s website states that the Trump team “will be working to dismantle the Dodd-Frank Act and replace it with new policies to encourage economic growth and job creation.”

The president-elect has tapped Paul Atkins, a former Republican member of the Securities and Exchange Commission and longtime Dodd-Frank critic, to recommend policies on financial regulation. An aide to Mr. Atkins, who heads a financial regulation consulting firm, referred requests for comment to the Trump transition team, which couldn’t be reached.

Mr. Hensarling’s bill is built around a trade-off: Banks can free themselves from various regulations, such as tough stress testing, as long as they maintain capital equal to at least 10% of total assets and high ratings from their regulator.

That would immediately help many small locally focused banks that tend to be better capitalized, but not necessarily megabanks with sprawling international operations that generally have capital levels below that level.

In the interview, Mr. Hensarling said he would try to convince Mr. Trump’s team to support his approach instead of their campaign-trail promise to reinstate the Depression-era Glass-Steagall law separating traditional lending from investment banking.

Mr. Hensarling’s bill also would make other significant changes, such as requiring that many financial regulations be subject to cost-benefit analysis for the first time and tying the budgets of regulatory agencies, including the CFPB, to congressional appropriations.

The CFPB has enjoyed a high level of independence by getting its funds from revenues insulated from the legislative process.

It is possible Senate Democrats could seek to block GOP efforts they view as overreach, but lobbyists and congressional aides are optimistic that some moderate Democrats up for re-election in 2018 in states that voted for Mr. Trump will be inclined to compromise. Republicans also may come under pressure to change the Senate rules to ease passage of controversial legislation, but it is far from clear they would make that move.

Our take:

The proposed Seller Finance Enhancement Act – HR 5301…, an amendment to the Dodd/Frank legistation is way over due

This bill rolls back some of the excessive regulations of Dodd/Frank by allowing Seller Financed transactions to expand from 3 in a rolling 12 month period to 24 in a year.

While this is not a massive change, it will provide significant relief for the vast number of real estate investors who choose to seller finance property.

When a note buyer begins their due diligence, there are 6 factors that are considered when a note is underwritten. They are determining and trying to mitigate their risk. The note seller took the promise of the house buyer that they would pay per the terms of the note. We as the buyer are being asked to assume that promise—that risk. Sometimes cart blanch. Therefore, it is our job to trust but verify. In the event the note is not perfectly structured, we’ll mitigate our risk with a discounted offer.

Borrower –are they bankable? The #1 influence on a note’s value is the person making the payments.

This is also the first thing an investor checks when going through the due diligence process. The buyer affects many other factor’s in the value on a note such as the collateral’s upkeep, the down payment, the seasoning, etc. Whenever you are valuating a note, making a buyer profile should be top priority. Included in the profile:

Type of buyer, rehabber or “mom and pop” (sold personal residence)?

Did you happen to review the buyer’s tax returns?

Did you verify their credit?

Income (ratio or proof)

Job / Employment

Another words, since you were lending them $$$$, you would want to make sure they’d pay you back?

The credit on a buyer is not just their FICO score, but the 5 C’s of credit and how each factor complements or redeems another.

Capacity to repay is the most critical of the five factors, it is the primary source of repayment – cash. The prospective lender will want to know exactly how you intend to repay the loan. The lender will consider the cash flow from the business, the timing of the repayment, and the probability of successful repayment of the loan. Payment history on existing credit relationships – personal or commercial- is considered an indicator of future payment performance. Potential lenders also will want to know about other possible sources of repayment.

Capital is the money you personally have invested in the business and is an indication of how much you have at risk should the business fail. Interested lenders and investors will expect you to have contributed from your own assets and to have undertaken personal financial risk to establish the business before asking them to commit any funding.

Collateral, or guarantees, are additional forms of security you can provide the lender. Giving a lender collateral means that you pledge an asset you own, such as your home, to the lender with the agreement that it will be the repayment source in case you can’t repay the loan. A guarantee, on the other hand, is just that – someone else signs a guarantee document promising to repay the loan if you can’t. Some lenders may require such a guarantee in addition to collateral as security for a loan.

Conditions — the intended purpose of the loan. Will the money be used for working capital, additional equipment or inventory? The lender will also consider local economic conditions and the overall climate, both within your industry and in other industries that could affect your business.

Character is the general impression you make on the prospective lender or investor. The lender will form a subjective opinion as to whether or not you are sufficiently trustworthy to repay the loan or generate a return on funds invested in your company. Your educational background and experience in business and in your industry will be considered. The quality of your references and the background and experience levels of your employees will also be reviewed

Collateral—down payment and the Condition of asset

Kinda like car dealer, they typically wants to get some down payment. You want to have a safety net.

Things to consider on collateral:

◆ Owner occupied or rental?

◆ Commercial or single family residence?

◆ Rehabbed home or prior residence of seller?

A home (single family residence) sold by the previous owners would be more appealing to an investors than a rehabbed home or one secured by mobile home and land. Previously, most collateral using seller financing were “unique” properties such as mobile home & land, land only or homes that bank’s wouldn’t finance. Due to the current economy however, seller financing is being placed on properties from single family residences to commercial property, giving their notes better value on the secondary market.

Equity –in the home as it related to the down payment and loan amount. Typically our underwriters are looking for 25-30% Equity in a single family. 50% on a mobile home or land. Otherwise known as “skin in the game”, the down payment on a note is important for two reasons.

The amount of down payment determines the Loan To Value(LTV) on a note (the lower the better), which investors look at when considering purchasing, and

It shows the buyer’s commitment to the property. The more they’ve personally invested, the greater chance they will continue to not only maintain the property, but stay current on payments.

Terms of note–The interest rate, amortization and balloon (if applicable) weigh on a note’s value in the following ways:

Interest: If a note has no interest it is a nail in the coffin of any possible note deal. If the interest rate is low, it will also take a hit on the discount. The higher the interest rate, the less of a discount the seller will have.

Amortization: The longer the note is amortized, the larger the discount. To combat this, most brokers present clients with a partial purchase offer alongside the full purchase offer.

Balloon: A note with a balloon has less of a discount because the money is closer to the payout. However, in certain cases a balloon that is too short can play a negative role in evaluating a note. The likelihood of refinancing to pay off a balloon must be logical and practical when cast against the buyer’s credit and current economy.

Seasoning—pay history. Paying not just their monthly payments, but are the taxes and insurance paid on time.

Depending on the credit of the buyer and the collateral (rehabber or not) the seasoning for note’s is typically as follows:

3-12 months: Best credit, not a rehabbed property

12 months or more: Sub 625 credit, rehabbed property

Paperwork –is there a lenders title policy? How is the note Serviced? Who pays the taxes & insurance

A well written note is typically serviced by an outside servicier, which is paid for by the buyer. We always use an outside servicier, therefore that is another cost we’ll incur.

Finally you have the last factor in a note’s evaluation, the paperwork. What investors verify are the following:

Note, Deed of Trust, Land contract, etc.

Federal Disclosures—is the note Dodd-Frank compliant?

Loan Application Verifications: includes income, employment and down payment.

If any of the variables are off on the above, the note will trade at a greater discount. But we can do some really creative stuff.

I would like to think that I’m a pretty savvy landlord. I’ve had a lot of experience both in and out of housing court dealing with adverse and hostile tenant situations. I have to admit, though, that I recently got outsmarted by a squatter.

I made an agreement on behalf of a client for a certain man to rent a mobile home space and buy the trailer from the park. This man failed to comply, so we served a 3-day notice and began the eviction process. When the process started, this guy moved someone else in and he moved out, giving them a handwritten but notarized “Bill of Sale.” I was successful in getting my judgment for eviction against him, but when we went to execute the writ of eviction, we ran into a problem.

There was a squatter, whose identity we didn’t know, occupying the property and waiving a piece of paper claiming to have some degree of possessory rights to the trailer. The court informed me that because the writ of eviction was for just the one person, they had no legal authority to move anybody else out. Consider me unhappy but educated.

From now on, every one of the eviction complaints I do will name a John/Jane Doe(s), one or more unauthorized occupants who may be occupying the property under a claim of sub-tenancy or otherwise. Does this sound a little more complicated? Yes. Does it sound a little more expensive? Yes. Naming an additional defendant will probably cost a few dollars more in filing fees, but the hassle and aggravation of having to start over on an eviction and wait another three weeks to get this squatter out makes it worth it to begin doing this as part of my standard procedure.

I’ve seen the same tactic being used in a number of judicial foreclosure cases where they identify a John or Jane Doe tenant who may be either a spouse of an owner of record/borrower or a tenant at the property.

Since my goal is to get a court order giving my client the legal right to have all other persons forcibly removed from the property, as well as all of their personal property and possessions, I want to make sure that order is as broad as possible, including the names of anybody and everybody I know who is occupying the property, as well as the potential John/Jane Doe(s).

If you are involved in evictions, talk with your lawyer about this strategy.

Our take–most landlords/noteholders would never consider this strategy. This tip could save thousands in either lost time or lost money. If the occupant is challenging a quick eviction could save potential property damage.

By Nick Cunningham
Posted on Wed, 13 January 2016 22:53 | 0
Low crude oil prices since the second half of 2014 have created a boon for consumers as the cost to fill up at the pump has plunged. The extra cash in the pockets of millions of motorists is often likened to an unexpected tax cut, which could help stimulate the economy.
Leaving aside the true extent of such a stimulus, which is debatable, there is a flip side to that coin. The collapse in crude oil prices is a huge blow to areas where oil extraction and associated industries are the bread and butter of the economy.
As petro-economies suffer from the bust in crude prices, the effects are showing up in the housing market.
Take North Dakota, for example, which was on the front lines of the oil boom between 2011 and 2014. In fact, North Dakota is probably the most vulnerable to a downturn in housing because of low oil prices. The economy is smaller and thus more dependent on the oil boom than other places, such as Texas. The state saw an influx of new workers over the past few years, looking for work in in the prolific Bakken Shale. A housing shortage quickly emerged, pushing up prices. With the inability to house all of the new people, rent spiked, as did hotel rates. The overflow led to a proliferation of “man camps.
Now the boom has reversed. The state’s rig count is down to 53 as of January 13, about one-third of the level from one year ago. Drilling is quickly drying up and production is falling. “The jobs are leaving, and if an area gets depopulated, they can’t take the houses with them and that’s dangerous for the housing market,” Ralph DeFranco, senior director of risk analytics and pricing at Arch Mortgage Insurance Company, told CNN Money.

New home sales were down by 6.3 percent in North Dakota between January and October of 2015 compared to a year earlier. Housing prices have not crashed yet, but there tends to be a bit of a lag with housing prices. JP Ackerman of HouseCanary says that it typically takes 15 to 24 months before house prices start to show the negative effects of an oil downturn.

According to Arch Mortgage, homes in North Dakota are probably 20 percent overvalued at this point. They also estimate that the state has a 46 percent chance that house prices will decline over the next two years. But that is probably understating the risk since oil prices are not expected to rebound through most of 2016. Moreover, with some permanent damage to the balance sheets of U.S. shale companies, drilling won’t spring back to life immediately upon a rebound in oil prices.

There are some other states that are also at risk of a hit to their housing markets, including Wyoming, West Virginia and Alaska. Out of those three, only Alaska is a significant oil producer, but it is in the midst of a budget crisis because of the twin threats of falling production and rock bottom prices. Alaska’s oil fields are mature, and have been in decline for years. With a massive hole blown through the state’s budget, the Governor has floated the idea of instituting an income tax, a once unthinkable idea.

The downturn in Wyoming and West Virginia has more to do with the collapse in natural gas prices, which continues to hollow out their coal industries. Coal prices have plummeted in recent years, and coal production is now at its lowest level since the Reagan administration. Shale gas production, particularly in West Virginia, partially offsets the decline, but won’t be enough to come to the state’s rescue.

Texas is another place to keep an eye on. However, Arch Mortgage says the economy there is much larger and more diversified than other states, and also better equipped to handle the downturn than it was back in the 1980s during the last oil bust.

But Texas won’t escape unscathed. The Dallas Fed says job growth will turn negative in a few months if oil prices don’t move back to $40 or $50 per barrel. Texas is expected to see an additional 161,200 jobs this year if oil prices move back up into that range. But while that could be the best-case scenario, it would still only amount to one-third of the jobs created in 2014. “The biggest risk to the forecast is if oil prices are in the range of $20 to $30 for much of the year,” Keith Phillips, Dallas Fed Senior Economist, said in a written statement. “Then I expect job growth to slip into negative territory as Houston gets hit much harder and greater problems emerge in the financial sector.”

After 41 consecutive months of increases in house prices in Houston, prices started to decline in third quarter of 2015. In Odessa, TX, near the Permian Basin, home sales declined by 10.6 percent between January and October 2015 compared to a year earlier.

Most Americans will still welcome low prices at the pump. But in the oil boom towns of yesterday, the slowdown is very much being felt.

The U.S. Supreme Court ruled on Monday that an underwater second mortgage cannot be extinguished, or “stripped off,” as unsecured debt for a debtor in bankruptcy, according to the Supreme Court’s website.

In the cases of Bank of America v. Caulket and Bank of America v. Toledo-Cardona, Florida homeowners David Caulkett and Edelmiro Toldeo-Cardona had filed for Chapter 7 bankruptcy and had second mortgages with Bank of America extinguished by a bankruptcy judge following the housing crisis of 2008 based on the fact that they were completely underwater. On Monday, just more than two months after hearing arguments for the case, the Supreme Court ruled in favor of the bank.
When the Supreme Court heard arguments for two cases on March 24, attorneys representing Bank of America contended that the high court should uphold a 1992 decision in the case of Dewsnup v. Timm, which barred debtors in Chapter 7 bankruptcy from “stripping off” an underwater second mortgage down to its market value, thus voiding the junior lien holder’s claim against the debtor. Attorneys for the debtors argued that the Dewsnup decision was irrelevant for the two cases.
Bank of America appealed the bankruptcy judge’s ruling for the two cases, but the 11th Circuit U.S. Court of Appeals upheld the bankruptcy court’s decision in May 2014, going against the Dewsnup ruling by saying that decision did not apply when the collateral on a junior lien (second mortgage) did not have sufficient enough value. The bank subsequently appealed the 11th Circuit Court’s ruling.
The Supreme Court ruled on Monday that the second mortgages should not be treated as unsecured debt, hence upholding the Dewsnup decision. Justice Clarence Thomas, in delivering the opinion of the court, wrote that, “Section 506(d) of the Bankruptcy Code allows a debtor to void a lien on his property ‘[t]o the extent that [the] lien secures a claim against the debtor that is not an allowed secured claim.’ 11 U. S. C. §506(d). These consolidated cases present the question whether a debtor in a Chapter 7 bankruptcy proceeding may void a junior mortgage under §506(d) when the debt owed on a senior mortgage exceeds the present value of the property. We hold that a debtor may not, and we therefore reverse the judgments of the Court of Appeals.”
“The Court has spoken, and we respect its ruling,” said Stephanos Bibas, an attorney for defendant David Caulkett, in an email to DS News. “But we are disappointed that the Court extended its earlier precedent in Dewsnup v Timm, even though it acknowledged that the plain words of the statute favor giving relief to homeowners such as Messrs. Caulkett and Toledo-Cardona. We hope that in the near future, the Administration’s home-mortgage-modification programs will offer more relief to homeowners in this situation struggling to save their homes.”
A Bank of America spokesman declined to comment on Monday’s Supreme Court’s ruling

The Mortgage Debt Forgiveness Relief Act has been extended for two years. This really will be helpful to many individuals who were thinking about selling their underwater primary residences and trying to avoid taking a tax hit.

We now have a two-year extension that looks like it is going to be approved and signed into law. That extension covers all of 2015 and 2016. Part of the reason for this year’s delay was the resignation of former Speaker of the House John Boehner and his replacement by Paul Ryan. This put a new individual, Congressman Brady, in charge of the House Ways and Means Committee that had jurisdiction over this particular important tax proposal as well as many other important tax proposals.

The National Real Estate Investors Association has been diligently working on this project through John Grant, National REIA’s lobbyist in Washington, DC. Some of the things National REIA did in order to get this legislation enacted included getting articles published much earlier this year in influential Washington newspapers in order to gain more support. Within a few days of getting an article published in Roll Call magazine, we were able to accumulate another 41 bipartisan sponsors of the House legislation.

At the same time, National REIA’s lobbyist was working with a number of key senators from both sides of the aisle on getting this extension for a minimum of two years. It was this strength in the U.S. Senate which National REIA built that ultimately convinced the House to go with a two-year extension instead of just a one-year extension.

Why is this important? It will help the real estate economy. It helps underwater homeowners.

The Consumer Financial Protection Bureau this week issued final changes to its mortgage rules, enabling responsible lending by small creditors, especially those operating in rural and underserved areas.

The new language – proposed in January – aims to increase the number of financial institutions, such as community banks and credit unions, able to offer certain types of mortgages in rural and underserved areas. It also gives small creditors time to adjust their business practices to comply with the rules.

Among the industry-supported provisions is a revised small-creditor definition. The final rule expands the designation to include banks that make fewer than 2,000 loans annually. Previously, the cutoff was 500. Loans held in portfolio – in which community banks retain 100 percent of the credit risk and a direct stake in the loan’s performance – will not count toward the loan total.

Also, industry supporters believe the changes will enable more community banks operating in rural areas to meet the unique mortgage needs of homeowners by deeming portfolio balloon mortgage loans they make to be qualified mortgages under the CFPB’s ability-to-repay rule.

When investing in private mortgage loans, you should rely on someone experienced in reviewing and analyzing these types of alternative investments. It is not rocket science and not a new idea going back to the 1930’s’s with insurance companies. There are a few items to keep in mind as you consider investing in private mortgage loans:

Collateral

We all enjoy purchasing items for a lower cost than average, especially big ticket items right? With a private mortgage loan investment, it is no different. If you lend 50% of the value of an investment property – with the intention of collecting a passive fixed income from the mortgage interest – even if the borrower were to default on the loan, you have inadvertently acquired the real estate asset half off through claiming the real estate title via foreclosure. Depending upon the property, you may be able to rent out the unit and potentially gain a 50%-100% higher annual return than what you were making on passive mortgage interest income. If of course, you wanted to recoup your principal invested and additional profit you could simply resell the property.

Repayment Ability

While how much equity or collateral the real estate contains most often comes to mind when discussing private mortgage loans, the repayment ability of the borrower is a crucial part of determining whether or not to make an investment. The issue of repayment ability addresses the level of certainty as to whether or not a borrower will make the regularly scheduled payments versus defaulting on the loan. If the rental income more than covers the mortgage payment and monthly property expenses, then there’s a higher likelihood of repayment. For a borrower purchasing and renovating a property to resell, if they’ve recently completed and resold previous projects similar to the subject property, then the new loan is being secured should present a higher likelihood of repayment. Requiring the borrower have a certain amount of their own cash into the property also lowers the default risk. Ultimately, most investors desire a passive fixed income investment and generally have an aversion to foreclosing on any property.

Exit Strategy (Loan Repayment)

In this day and age where banks aren’t even lending to well qualified buyers, knowing how your principal investment will be returned is crucial. For example, if you provide a two year interest only balloon loan on a rental property with the strategy for the borrower to refinance or resell, a few factors should be considered. What’s the borrower current credit history? Are there additional free and clear properties or other assets that could repay your loan via selling those assets? Do they have a history of repaying short term loans on other properties that can evidence they’d pay this new one off? What if the real estate market declines and they can’t obtain the resale price they want for the property?

No single answer to the questions listed above will provide a concrete or definitive conclusion, however, the overall experience level of the borrower should be weighed more heavily upon for balloon payments. Each private mortgage investor should be thoroughly aware of how the borrower is going to pay back the loan when it comes due. There are numerous examples of private lenders being forced to extend loan terms on ballooning loans because there’s no way to refinance the property. This can be problematic, especially if the mortgage holder needs to receive their principal investment back at a specific time or deadline. One way to overcome the obstacles present with a balloon mortgage, is to offer a fully amortizing loan on existing rental properties where the rental income can more than sufficiently repay the mortgage and property expenses. Not only are you being repaid your principal invested, but there is less debt owed on the property over time, ultimately reducing your exposure to a loan default because so much equity is built up in the property.

Experience Level

Lending to a borrower with a track record of successful real estate investing is always preferable for private mortgage investors that are seeking a passive fixed income. While you could loan to a first time investor with perhaps a larger down payment, a first time borrower without real estate experience often is required to put additional cash into an investment real estate transaction to compensate for this increased risk.

Credit and Character

Life happens and often bad things happen to good people. Some real estate investors who have owned properties and personally signed for loans have experienced foreclosures or loan modifications on properties they owned over the past few years. This does not in and of itself rule out making a private mortgage loan, however, often times a large cash down payment is required and/or a reduction of the loan to value is required to reduce the loan default risk.

In an age of global financial markets being so interdependent, hard earned dollars are put into investments with the risk of loss often obscured. Why not invest in what everyone on earth needs to live; a place called “home”. When facilitated in a thorough and conservative manner, private mortgage loans are a great source of passive income with the ability to preserve your principal investment even in the event of a loan default.

LANDLORD PROBLEMS

Traditional investors hold their real estate as rental properties.

Most are tired of dealing with tenants and toilets. Dirty tenants can be landlord’s nightmare, and ……. They are very expensive! They can bring down the real and perceived value of your rental property. Unclean living conditions will not only damage the property, but they will attract bugs and rodents, and ultimately make it very difficult to re-rent.